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How the raw material shortages and the energy crisis affect small companies

by Sara Räisänen December 02, 2021 7 min read

Graph pointing upwards with caption "effects of material shortage"

The industrial raw material shortage, transportation delays and high prices are approaching highest levels in recent history. In addition, the on-going energy crisis happening in China has forced factories in several provinces to cut down their operations. Coal shortages, tightening emission standards and strong demand from manufacturers and industry have pushed coal prices to record highs and forced restrictions, which have begun to shake global markets and threaten availability as early as Christmas sales.

As a small company that is currently bringing its first collection to the market, we were right away face to face with production challenges, delays, price increases and limited availability. How has the shortage of raw materials and the energy crisis in production during the last year affected the operations of a new company?

 

The background to the crisis is multifaceted


There are multidisciplinary reasons behind the production problems, which can be attributed to the global corona pandemic. Once the pandemic hit Europe and the west, China was already experiencing a full crisis and, at the same time, factories were closed due to strict restrictive measures. While the factories remained closed, the amount of raw materials available decreased rapidly and concerns about their inadequacy in the long run began to awaken. During the global telecommuting and social isolation, sales of technology and consumer goods began to increase in general, and many companies ordered full inventory to avoid running out of goods due to increased demand.

 

When the factories were able to start operations again, their order volumes were reaching their limits. As the factories kept operating around the clock to reach delivery volumes, they also consumed a record amount of energy. Increased energy demand also boosted coal production, and at the same time the underlying goal of reducing emissions as part of China’s climate policy made annual energy consumption quotas met in an instant. The peak in demand made it more difficult to obtain coal, which in turn has drastically raised its price. 
Economies dependent on coal production are particularly vulnerable to fluctuations in the price and availability of fossil energy sources, which is why India, among others, is struggling with similar problems.

The effects of the pandemic and raw material shortage has naturally reached us, as well. 


With the power outages, electricity networks are currently giving priority to supplies to residents and electricity companies, and at the same time regulating the use of electricity by industrial companies in factories. The regulations are particularly strict, as depending on the size and consumption of the factory, the electricity is cut off for 4-5 days a week, leaving them up and running for only a few days. Our own suppliers are currently allowed to keep the factories running three days a week, which in practice means that the product launch will move to next year.

Regulating the operation of factories increases the length of queues that have already swelled and limits the availability of materials to months or even more years. As the majority of the materials used in the world come from China, material shortages and concomitant restrictive measures in production have a significant impact on global industry. China's energy crisis is not limited to Asia, and it can also be seen in domestic sales right under Christmas.

 

Starting with production on time

The component and raw material shortages in technology industry has forced us to change our original plans. Therefore, we decided to start more simply by launching a basic model of an electrical device to which we can later apply the technology developed in the future. That has proven out to be the right choice. Instead of having to wait with starting of production, we're able to launch a basic version of the same device and get it to the market quicker. At the same time, we will gain important experience with product launches and related details, and in the next step we will be able to further streamline the process.


The product launch and the first steps of a young company entering the market are full of questions. We have relied on experienced supporters and advisors we've gained during the product development phase, but we are in the production phase for the first time. It is thanks to our experienced background and our own foresight that we have been able to start our production. Although there will be a delay from the original release schedule in the fall, the delay is fortunately less than it could have been in these circumstances.


 

New practical arrangements


In many places, the prices of components and materials are higher than a year ago. We have been warned about the inadequacy of the materials and advised to keep the first order batch as small as possible so that the ordered parts can actually be delivered within the desired time. The slowdown also affects our operations in terms of marketing and distribution channels. The initial idea of ​​building a retail network will have to wait, and we will start selling mainly through our own online store. However, due to the limited first batch, the arrangement works quite well for us, and the distribution network is planned to increase in the second half of next year as production volumes increase.


We have prepared for the delays by ordering all deliveries directly to the office and have decided to assemble the first batch ourselves. We have always wanted to provide the best possible service to our customers and design products that we can stand behind 100%. By assembling the first batch ourselves, we can make sure everything is exactly as it should be, and at the same time speed up deliveries. It is a significant advantage for us that many bigger competitors cannot match.


The product price is built on an entity that is also affected by our design and development work in Finland and the manufacture of the product within the EU. The first product batch is smaller in size and in many ways instructive, starting with order quantities, schedules and shipments. Managing inventory levels and anticipating them appropriately, as well as meeting demand, could prove challenging if there were uncertainties about delivery times. We have been in active contact with suppliers and thus kept up to date with schedules.


The future comes with challenges


It is not yet possible to give a valid estimate of the duration of the situation, because the various reasons behind it are still very much present and the pandemic is not over. In any case, the effects will extend precisely to the next couple of years due to production delays as well as material availability problems. For example, the purchase of electronics and toys may prove problematic in the future.

Other sectors directly affected by the crisis are metals, chemicals and cement - all of which are energy-intensive. The market is unbalanced and takes time to recover before the quantity requested corresponds to the quantity delivered at market price. Indeed, consumers experience the greatest impact in terms of rising prices as high energy prices shift to manufacturing costs and raise the price of the final product.


Slowdowns and extended queues in the availability of materials are slowing down new innovations and market entry for companies. In particular, the technology sector, where product development is done on a busy schedule, simply suffers from missing parts. For example, Apple may have to postpone the launch of their new smartphone. Everyone is fighting for the same scarce resources, and in it, the smaller player is easily left behind by the giants. However, as a small business, we are able to react quickly to change, maintain a pragmatic approach at every stage of the production process and be flexible with the situation to provide quality service even in the midst of challenges.


We focused on the electrical device that was possible to complete at this point. However, as it is a matter of improving existing solutions, increasing efficiency and, increasingly, responsibility, the obstacles to innovation are a major risk for future development and the fight against climate change, to which we also want to contribute.



We are on the right track


The shortage of raw materials and energy has also strengthened our understanding of what we are doing and why. Dependence on carbon can prove fatal in many areas, in addition to significant climate problems. We want to build our production on a responsible basis. Make choices that take a closer look and follow the principles of sustainable development. The shortage has demonstrated the industry's dependence on continued availability and the problems of low-cost production. The whole industry is in dire need of sustainable solutions in order to build a responsible foundation for the future. Respond to the growing need for technology while developing solutions to support the potential of technology for future generations. We want to support local production, recycling and responsible sourcing of materials and find solutions that support us on the chosen path and, we hope, arouse interest in the wider industry. We also see responsibility as part of independence, as a sustainable operating model also guarantees flexibility and options for all stages of the production process.


At the same time, we see our own product range meeting demand. It offers responsibly produced, sustainable and long-lasting consumer goods that seek to get rid of disposability and habits that emphasize continuous consumption. Opportunities for future development work are optimal. We will do the work we firmly believe in and move forward in our plan according to opportunity and situation. With the prevailing conditions, we learn to cope in the midst of challenging times and build our operating model to withstand uncertainty and exceptional situations. Our company will stand on a sustainable base and provide solutions that, instead of just provide usage, can save nature and minimize unnecessary consumption, as well as increase awareness of one's own consumption habits.


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